After a lull last week, the stock markets are bracing themselves for the biggest event of the year—the Union Budget. For the past several weeks, the markets have been very volatile and have displayed a negative bias tracking global cues. This was primarily due to the fact there were no positive triggers in the domestic economy. Weekly inflation numbers, monthly industrial output statistics and projected annual Gross domestic product (GDP) figures lacked surprises and were more or less on expected lines.
Negative sentiments on bourses, largely driven by a fear of heights (the recent highs of Sensex) also seem to be overdone, though TV experts on stock markets will not really agree with me. Now, everyone is hoping that the Budget will bring in some positive sentiments. What the Budget will actually deliver is anybody’s guess. But one thing that looks certain is that it will have no negative surprises, and that will be good news for the markets. The main difference between this Budget and previous ones is on the expectations front. Unlike previous budgets, there are no major expectations on the part of the markets and investors from this one. Issues such as taxation, rationalization of duties, etc., are most likely to be liberalized, so the markets do not have too many apprehensions. From a macro-economic point of view, the markets have adopted a “wait-and-watch” attitude that will continue in the initial part of this week. Till the time the Budget unfolds and the markets look to domestic factors for triggers, global cues, mainly from the US, will continue to drive global markets.
Looking forward, Friday’s spurt on the US bourses in the last half an hour of trading could bring in some cheer on bourses on Monday. US stocks bounced back sharply on news that banks were near an agreement to bail out bond insurer Ambac Financial, a deal that could prevent further damage to the banking industry and credit markets of the US. I have been maintaining for some weeks that market- moving news from the US markets will actually come from bond insurers. If Friday’s market talk turns into reality, then there could be a turnaround on bourses globally despite looming fears of a recession in the US. It is expected that the bail-out plan for Ambac Financial will take some shape by Monday or latest by Tuesday. I think this will pep up the mood on bourses in Asia, when they resume trading on Monday.
Other than the bail-out plan, this week is an important week from the data point of view in the US. The release of a lot of critical data is on the cards, and some of this will make the country’s economic position clearer. In the beginning of the week, data related to the housing sector will be under the lens. On Monday, data on existing home sales will be watched carefully for clues on how the housing sector has performed. This will be followed by the release of the S&P/Case-Shiller Home Indexes on Tuesday. Data on new home sales is set for release on Wednesday. And after Merrill Lynch’s rating downgrade of Freddie Mac, the quarterly results of Toll Brothers Inc. on Wednesday and Freddie Mac on Thursday could create a further stir on US bourses.
Thursday will be an important day for the US also because an updated report on fourth-quarter GDP will be released. This will be followed by a heavy dose of data on Friday covering January personal income and spending and the Chicago Purchasing Managers Index for February.
Another important event to watch out for is Federal Reserve chairman Ben Bernanke’s semi-annual testimony to congressional committees on Wednesday and Thursday, which is immediately after the January reading on the Producer Price Index, set for release on Tuesday. With the Producer Price Index on a sharp uptrend and crude prices continuing to rise, analysts will try and read between the lines of Bernanke’s testimony for any cues about Federal Reserve’s strategy—will it try to control inflation or to kick start economy?
This will be Bernanke’s toughest call, and it could seal the fate of the US economy in the short term. With so much on cards, I think there will be enough action on the bourses not only in the US but also globally.
Back home, the countdown to the Budget is into its final stages and we will get a lot of data to churn, beginning with the Railway Budget, which will live up to its relevance of a non-event, followed by the economic survey, which has essentially become a mere statistical summary rather than being a white paper on the economy. However, the Budget will be keenly watched, although political compulsions will likely ensure that longpending issues such as labour reforms and matters related to subsidies will once again escape the attention of the finance minister. Hopefully, the minister will continue to stress on the importance of managing the fiscal deficit.
Analysts will also look at his stand on monetary policy and the markets would like to hear how he proposes to prop up the economy. Looking at it from a broader perspective, this should be a positive Budget. In my opinion, the Budget this year should give a boost to the stock markets. The result could be a post-Budget rally.
Currently, the market is in danger zone and any further slip could mean more losses. However, since Monday looks good for the markets, I am hoping for some initial spurt. If the markets sustain their initial momentum, which they failed to do last week, then there could be good build-up ahead of budget. This week, derivative contracts for the month of February are set to expire on Thursday and this will ensure that the bourses continue to remain volatile. Taking all things together, this week is going to be volatile with a positive bias initially.
On the upside, the Sensex is likely to come across its first meaningful resistance at 17,880 points, well above its Friday’s close of 17,349.07 points. Following this level, the next resistance is likely to come at 18,316 points. In between, there will be moderate resistance at 18,098 points. Any close above 18,316 points would mean happy days ahead as the Sensex would then test its next resistance at 18,924 points. On its way down, the first support is placed at 17,142 points, which if broken with more falling volumes could mean deteriorating sentiments, and a close below 16,988 would mean a sharper fall, which may take the Sensex to its January lows.
Technically this week, Sterlite Industries Ltd, IVRCL Infrastructure and Projects Ltd and Oil and Natural Gas Corp. Ltd (ONGC) look good on our charts. Sterlite Industries at its last close of Rs800.85 has a target of Rs829 with a stop-loss of Rs773. IVRCL Infrastructure at its last close of Rs467.95 has a target of Rs494 with a stop-loss of Rs442. ONGC, which last closed at Rs998.65 has a short-term target of Rs1,050 with stop-loss of Rs954.
From out last week’s recommendations, Reliance Communications Ltd touched a high of Rs632.40, but failed to touch its target of Rs649 and is still a recommendation for this week with its stop-loss of Rs576 and target still intact. Reliance Energy Ltd hit a high of Rs1,775 and easily met its target of Rs1,768. DLF Ltd touched a high of Rs899 but fell short of its target of Rs914 and later hit its stop-loss of Rs851. ACC Ltd, which was a spillover recommendation from the previous week, a shot up sharply and hit its target of Rs809.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org